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Focus: Tabcorp bonds herald new retail debt market

31 March 2009

In brief: Tabcorp Holdings Limited has made the first major retail offering of corporate bonds by an ASX-listed company in almost 20 years. Partner David Clifford looks at the offer.

How does it affect you?

  • Retail bond markets may offer a valuable new source of funds for companies willing to consider some new angles on a long-dormant market.
  • Issuers and their advisers are now addressing the previous market limitations to make the market more flexible and attuned to the broad funding needs of corporates.
  • The recently announced retail bonds offer by Tabcorp Holdings Limited (Tabcorp) may be the first of many.

The new retail debt market

The re-emergence, after many years, of a market in Australia for retail unsubordinated bonds ('unsecured notes') issued by companies is now being confidently predicted by a number of debt market participants. Tabcorp's recently announced retail bonds offer (on which Allens advised) may be the first of many.

The Tabcorp Bonds are ASX-listed, and will rank on an unsubordinated, unsecured basis equally with all other unsubordinated, unsecured debts of the issuer, including bank and other debt and ordinary creditors of the business. Tabcorp has announced that it is aiming to raise $200 million through the offer.

A long break

A comparable market disappeared several decades ago, when wholesale bank debt became easier to source for companies in Australia and when foreign public debt markets opened up in large volumes for Australian issuers.

Another factor in the disappearance was that companies wished to avoid the extra legal and commercial burdens associated with retail bonds. Under the Corporations Act 2001 (Cth) (and it was the same under earlier, equivalent, legislation), trust deeds and trustees are required for retail issues of debt. There is also the risk of financial and commercial covenants given by the issuer under the terms of the bonds not being able to be altered easily, even when it is appropriate to do so, because of the need to convene a meeting to seek the approval of a large group of retail investors.

In addition, the due diligence process for a single offer of these retail bonds became, over time, increasingly costly and time consuming for the issuers and their advisers.

What's different now?

Issuers and advisers are now addressing these difficulties by having the retail debt terms made less directly onerous in several respects (although retaining essential terms like a 'no better bond negative pledge'). At the same time, they are effectively being brought fully back to 'market' by being tied in various ways to the terms of the wholesale bank and institutional debt of the issuers (for example, by containing a cross-default term, or having a common guarantor group with accession and release mechanisms that are connected to an issuer's other guaranteed debt). There is an increasing attempt to align the retail and wholesale markets' terms for the issuers of debt in a practical way, even though the process of offering is still different and the actual documents are different in form and the detail of disclosure.

Individual issuers will approach these alignment considerations with some different considerations of detail, but it can be expected that the basic aim will be the same, to align the retail and wholesale terms.

Shorter documents

Issuers and their advisers also want to standardise documents in retail issues, at least at the level of the basic terms and the documents 'platform' and the materiality and style of disclosure.

In this regard, there is a desire to make the offering documents for retail debt issues more user-friendly and, especially, shorter than in the past, by avoiding reproducing in full unnecessary mechanical provisions or documents in the prospectus.

A number of new legal questions have arisen. The Corporations Act has moved on in some respects since the days of the previous market. However, not surprisingly, some of the old provisions remain to be considered in the light of new events and conditions.

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